Indiana lawmakers who hope to adjourn Thursday got more bad financial news Tuesday as they continued to wrangle over school budget cuts, an increase in the unemployment insurance tax and proposals designed to create jobs.

Figures released Tuesday showed February tax collections fell $86 million short of a December forecast. Revenue is now $895 million less than predicted by a May forecast lawmakers relied on when they passed the current two-year budget in June.

Republican Gov. Mitch Daniels has imposed hundreds of millions of dollars in budget cuts already, but the state will exhaust what was a $1.3 billion surplus by the time the current budget cycle ends in June 2011 if revenue trends continue and there are no more cuts.

Daniels wants lawmakers to pass a series of bills he said would save the state an additional $65 million, the bulk of it by combining the administrative functions of the Public Employees Retirement Fund and the Teachers Retirement Fund. The Republican-ruled Senate has passed the measures, but Democrats who control the House have balked, saying the issue needs more study.

House Speaker Patrick Bauer, D-South Bend, said his caucus would revisit the measures in the remaining days.

But he said the best way to increase revenue is for Senate Republicans to agree to a series of tax credits and other job-creation incentives the House passed. Bauer claims those measures could create up to 80,000 jobs.

"We sent them over to the Senate, and they are not treating them too kindly right at this moment, but I understand they may readjust and help, and I'm hopeful they will," he said.

Both chambers have passed bills allowing schools to shift money from accounts funded by property taxes to general operating expenses to offset $300 million in state budget cuts. But the Republican bill approved by the Senate would only allow schools to do that if school employees, including teachers, don't get raises next school year.

Education lobbyists and many Democrats oppose that requirement, saying it would force schools to renegotiate contracts that include pay raises.

"It's hard to get people to the table," said Dennis Costerison, executive director of the Indiana Association of School Business Officials.

But Daniels said no pay raises for teachers next year was a fair trade-off for giving schools flexibility with their finances. State employees have gone two years without a raise, he noted.

House Democrats and Senate Republicans held their first combined meeting Tuesday on what to do about the state's unemployment insurance fund, which has borrowed $1.6 billion from the federal government to remain solvent.

The taxes employers pay into the system will go up later this year under a law the General Assembly passed last year. But Senate Republicans passed a bill this session to delay the increase one year, saying raising taxes now would cause businesses to layoff more employees.

The House voted to repeal the tax increase altogether, but House Democrats included some provisions Republicans don't like. One would increase the maximum amount a jobless person could receive each week, and the other would expand eligibility so the state could receive $148 million in federal stimulus dollars for the fund.

Republicans say the stimulus dollars could run out in two years, and then the changes would cost the state tens of millions of dollars each year.

Senate Tax Chairman Brandt Hershman, R-Lafayette, said after Tuesday's meeting that he hoped a compromise could be reached. But he said repealing the tax increase could lead to federal penalties and taking the stimulus money was a bad idea.

"There might be a very short-term benefit to it, but the long-term cost would further add to the bankruptcy of the UI trust fund," he said.